1 Spinoff That Investors Forgot

Nearly every investor remotely interested in health care stocks kept a watch on the recent spinoff of AbbVie (NYSE: ABBV  ) by Abbott (NYSE: ABT  ) . As well they should: It involved the creation of a new business with sales of $18 billion, instantly making AbbVie one of the largest companies in the world.

Meanwhile, another spinoff scheduled for the first half of 2013 isn't getting much attention these days. Pfizer (NYSE: PFE  ) is quietly moving forward with the planned IPO of its animal health business as a new company called Zoetis. Let's revisit this spinoff that some investors may have forgotten.

After the spin
Once the yet-to-be-determined magical day arrives, Zoetis will emerge as the largest animal health company in the world. The new company's annual sales of more than $4 billion should land it a spot in the S&P 500.

Zoetis will also be a company on the move both in the U.S. and across the world. Revenue has grown steadily over the past few years.

Source: Pfizer 10K report.

What about what will remain with Pfizer? The company recently sold its nutrition business unit to Nestle. That leaves all of the biopharmaceutical business plus consumer health care. Based on 2011 annual results, the slimmed-down Pfizer would have more than $61 billion in revenue.

Unlike Zoetis, though, the "new" Pfizer can't brag about across-the-board growth. While international sales have increased, the growth rate is slowing. Even worse, U.S. sales have begun to decline.

Source: Pfizer 10K report.

Basically, what we'll have in just a few months is a growing Zoetis and a slowing Pfizer. That might cause you to wonder if this move makes sense. 

A wiser Pfizer?
Looking at other big players could make you wonder even more. Merck (NYSE: MRK  ) chose not to spin off its animal health business, which ranks in second place behind Pfizer with $3.2 billion in 2011 sales. CEO Kenneth Frazier commented that the business segment "complement[s] our human health business and contribute[s] to the top and bottom line growth."

That decision comes with an asterisk, though. Merck and Sanofi (NYSE: SNY  ) announced a joint venture in 2010 that would combine the animal health businesses of both companies. However, the joint venture plans were ultimately scrapped in 2011 after the companies faced scrutiny from U.S. and European regulators.

Pfizer's approach could prove to be wiser in the long run. The company's patent cliff woes won't hold back Zoetis once the companies split. Pfizer plans to initially retain control of 80% of Zoetis, so its shareholders stand to benefit if Zoetis shares take off.

The Zoetis IPO will also raise a considerable amount of cash for Pfizer. With nearly $23 billion in liquid assets, does Pfizer really need more? It might.

The company lost U.S. patent protection for Lipitor in 2011, followed by patent expiration for Viagra and Detrol in 2012. Celebrex goes off patent in 2014. Although Pfizer has eight drugs in regulatory review and 17 drugs in late-stage clinical trials, the financial impact from the big drugs losing patent exclusivity won't be overcome in the near term. Additional cash could help Pfizer buy other products and/or companies to help cushion the losses.

Looking ahead
Many investors might have temporarily forgotten the "other" big health-care spinoff for 2013, but I expect their memories will be refreshed soon. Look for plenty of news in the coming months about Zoetis.

For current Pfizer shareholders, probably the best thing to do is hold on for the ride. Despite slipping revenue, Pfizer shares returned nearly 22% over the past 12 months. I wouldn't be surprised to see a continued -- although perhaps slower -- trend upward in 2013. The 3.6% dividend yield isn't too shabby, either.

As for new investors looking to jump on the Zoetis IPO in a few months, I would caution to at least look before you leap. My hunch is that Zoetis will attract a lot of interest, and its shares will respond positively. I like the prospects for the business. However, a good business doesn't always equate to a good stock -- and vice versa. And hunches can be wrong. Those are two things that investors should never forget.

What's inside Supernova?
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  • Report this Comment On January 17, 2013, at 3:34 PM, TheDumbMoney wrote:

    GET THE ABT chart fixed! It is showing a 50% drop on the day of the split, and was never historically adjusted. This is amatuer hour. Seriously, look it up. I submitted a bug request and nothing was done.

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